Speech
Australia's RMB Policies and Future Direction

I would like to thank David Olsson and the RMB Working Group for organising today's
Roundtable. It is very encouraging to see the ongoing interest in the topic
of RMB internationalisation from both government and business leaders. The
Reserve Bank is a strong supporter of the work that is going on and I am very
pleased to be able to participate.

For anyone interested in international trade or global finance, understanding the
issues we are talking about this morning should be very high on their agenda.
As I have said before, the internationalisation of the renminbi (RMB) and the
accompanying process of capital account liberalisation in China could well
turn out to be one of the seismic events in global capital markets over the
coming years.[1]
Ultimately, this process could see Chinese citizens be able to hold internationally
diversified portfolios, just as the citizens of many other countries are already
able to do. It could also see citizens from other countries able to buy and
sell Chinese financial and other assets with far fewer restrictions than are
currently in place. And it could see the Chinese currency become one of the
world's most actively traded. If these things do come to pass, then they
would reshape the nature of global capital flows and the international financial
system, just as China's entry into the global trading system reshaped global
trade and production.

As Australians, we have more than a passing interest in all of this. China is our
largest trading partner and our financial linkages with China, while still
relatively small, are growing. And by virtue of being a small open economy
with an already liberalised capital account, our markets will be affected by
changes in global capital flows. So understanding what is going on here is
important. This is true not just for those involved directly in the financial
sector, but for our society more broadly.

I have had the privilege of participating in the first two Australia-Hong Kong RMB
Dialogues, the first in Sydney last year and the second in Hong Kong quite
recently. From participating in these dialogues my sense is that we are making
progress and David Gruen in his remarks has outlined some of the examples.
More businesses are genuinely interested in exploring the advantages of having
trade invoiced in RMB. The financial infrastructure that supports this trading
is gradually being put in place. And some of the stumbling blocks and misperceptions
are being eroded.

There is, though, much further to travel on this journey. Currently, less than 1 per
cent of Australia's merchandise trade with China is invoiced in RMB. For
China, around 12 per cent of total merchandise trade in 2013 was invoiced in
RMB, although we estimate the number was around 3 to 5 per cent if trade with
Hong Kong is excluded. These figures suggest that there remains significant
potential for growth in RMB trade invoicing, not only by Australian firms,
but by firms in other countries as well.

Australia's own experience with liberalisation is that the growth of trade makes
financial liberalisation easier. As financial markets develop to support trade
relationships, those same markets can, in time, support deeper financial relationships.
Trade helps deepen financial markets, and deeper financial markets make it
easier to liberalise. In the end, though, how long this whole journey takes
in China is largely dependent upon the pace of reform by the Chinese authorities.

It is, of course, also dependent upon the speed with which the financial sector is
able to respond to any new opportunities. In part, the development of the appropriate
markets depends on commercial decisions made by financial institutions. The
Reserve Bank is seeking to play a positive role in this area, partly through
helping create a constructive environment in which these decisions can be made.
Given this, I would like to spend a few minutes outlining the various elements
of our work in this area.

First, we have sought simply to better understand how the RMB markets operate. In particular
we have sought to understand: the nature of the existing arrangements and products;
any impediments to the development of an RMB market in Australia; and how the
RMB market sits within the broader financial system. Our representative office
in Beijing has been helpful here as have the frequent trips by RBA staff to
China. We have also worked closely with the financial sector in Australia,
including with the RMB Working Group and have been involved in two separate
surveys of corporates' attitudes toward the use of RMB.[2]
These efforts have helped us develop a deeper understanding of the issues,
as well as understanding in the broader financial community. The joint work
has also assisted in providing a forum to support and to coordinate industry-led
discussions and initiatives.

Second, the RBA has invested some of its foreign currency reserves in RMB. First and foremost, this
portfolio shift reflects the growing importance of China in the global economy
and the broadening financial relationship between Australia and China. But
it has also allowed us to deepen our own understanding of developments in Chinese
financial markets and the RMB. Currently, around 3 per cent of our net foreign
reserves are invested in RMB.

Third, is the bilateral local currency swap agreement between the RBA
and the People's Bank of China (PBC). This swap, which was signed in 2012,
allows the two central banks to exchange their local currencies for mutually
agreed purposes. The key benefit of the swap agreement is to provide confidence
to the Australian market that RMB liquidity will be available through a ‘backstop’
channel in the event of some disruption to the market for RMB. The swap is
not meant to provide a ‘cheap’ source of RMB funding to the Australian
market in normal times. Its existence, though, should be helpful for market
development, as it provides market participants with greater confidence that
RMB will be available in Australia during times of dislocation. Since the swap
agreement was signed there has not been a need to activate it, although it
could be used should it be required.

Fourth, the RBA is currently working with the PBC on future RMB clearing and settlement
arrangements, in particular the establishment of an ‘official RMB clearing bank’ in Australia. In keeping
with the process that has recently been followed in a number of other jurisdictions
– including London, Frankfurt, Paris, Luxembourg and Seoul – this
would involve the signing of a Memorandum of Understanding between the RBA
and the PBC, and the designation of an official clearing bank in Australia.
It is important to note that the RBA would not expect to play a significant
role in choosing which particular bank would be designated – this is,
quite rightly, largely a matter for the Chinese authorities. In terms of timing,
we are hopeful that an official RMB clearing bank could be designated over
the coming months.

The concept of an official RMB clearing bank is one that is sometimes open to some
misunderstanding, so I would like to spend a few moments setting out how these
institutions operate. In essence, their key function is to facilitate cross-border
payments and receipts of RMB for trade-related purposes on behalf of other
financial institutions in the local market.

Of course, Australian importers and exporters are already able to make and receive cross-border RMB payments through
a number of existing channels. For example, Australian-based banks can facilitate
cross-border RMB trade transactions through correspondent banking relationships
with banks in mainland China, or through RMB clearing ‘services’
that are offered by Australian-based Chinese banks via their mainland Chinese
Head Offices. Similarly, these transactions can also be effected through other
offshore RMB centres, such as Hong Kong.

In fact, the differences between an official RMB clearing bank and the channels that
are already available are quite subtle, though still important. In essence,
official RMB clearing banks are afforded more direct access to China's onshore RMB and foreign exchange markets
than other offshore institutions. More specifically, official clearing banks
have direct access to China's interbank RMB payments system and receive
a quota to transact in China's onshore foreign exchange market. These changes
also entail more direct access to RMB liquidity from the PBC.

While an official RMB clearing bank would not directly increase the range or type of RMB transactions that are permitted
to take place between Chinese and Australian entities, it would improve the
efficiency of cross-border RMB transactions, for example by potentially reducing
payment delays and/or reducing transaction costs. And, over time, the presence
of an official clearing bank could encourage local financial institutions to
offer a broader range of RMB products to the local market than is currently
available.

Given the way in which the Chinese authorities have chosen to liberalise trading
in the RMB, these clearing banks are playing an important practical and symbolic
role. Indeed, the establishment of a clearing bank in Australia would help
ensure that we are well positioned to participate in the next stages in the
process of RMB internationalisation. Ultimately, though, if China does follow
the general path travelled by a number of other countries, these clearing banks
are likely to become less significant. In other currencies, alternative arrangements
exist for the clearing of cross-border flows, with financial institutions managing
the liquidity and risk issues without access to an official clearing bank.
If this eventually turns out to be the case for the Chinese currency as well,
then there is likely to be a reduced need for these official clearing banks.
In the meantime, they are an important stepping stone on the path to a more
internationally integrated Chinese currency.

Finally, a fifth step that we hope to take soon is to obtain a quota for Australian-based
financial institutions to invest in mainland China under the Renminbi Qualified
Foreign Institutional Investors (or RQFII) scheme. Following the granting of
a RQFII quota to a specific jurisdiction, financial institutions operating
within that jurisdiction can apply to the Chinese authorities to obtain an
individual investment quota. Approved institutions can then invest their own
quota in selected mainland Chinese bonds and equities using RMB obtained in
the offshore market. In this way, the RQFII scheme can be thought of as representing
both a partial relaxation of controls on inward portfolio investment to mainland
China and as a means of developing the offshore RMB market.[3]
An RQFII quota would therefore represent an important next step in facilitating
cross-border RMB-denominated investment transactions between our two economies.
And, as Australia has a relatively large and sophisticated private funds management
sector, there is significant potential for growth in this area.

So, in summary, a lot has been happening, both in the public sector and the private
sector. I regard it as very much in our collective interest to continue this
work. The changes that could occur in the Chinese financial system over the
coming years have the potential to be felt around the world. To benefit from
these changes, we need to understand them and be prepared for them.

Much of the work that we have been doing has been aimed at identifying and reducing
potential impediments to the development of RMB business here in Australia.
But once those impediments have been removed – and we are moving closer
to that point – the development of the market is very much up to the
private sector. Ultimately, in order for the RMB market in Australia to flourish,
Australian corporates must be able to identify a clear business case for paying,
receiving, lending, borrowing and investing in RMB. Over time, I think this
will happen, but there is more work to be done.

Thank you.

Endnotes

I would like to thank Michelle Wright for assistance in the preparation of these
remarks.
[*]

The survey in 2013 was coordinated by the RBA, while the 2014 survey was coordinated
by the Centre for International Finance and Regulation. The 2013 survey results
are summarised in Ballantyne A, M Garner and M Wright (2013) ‘Developments in Renminbi Internationalisation’,
RBA Bulletin, June, pp 65–74. The 2014 survey results are
summarised in Centre for International Finance and Regulation (2014), ‘Internationalisation
of the Renminbi: Pathways, Implications and Opportunities’, Research
Report, March.
[2]

The RQFII scheme exists alongside two other schemes that allow approved institutions
to invest foreign currency in selected mainland Chinese securities: namely,
the Qualified Foreign Institutional Investors (or QFII) scheme and a scheme
that is commonly referred to as the China Interbank Bond Market (or CIBM)
scheme. A number of Australian-domiciled institutions have already received
quotas under the QFII scheme, while the RBA's acquisition of RMB reserves
was facilitated under the CIBM scheme. The QFII and CIBM programs differ
in a number of respects, including: the types of mainland securities that
can be purchased; the types of investors that are eligible to apply; and
the mechanisms that are available to convert foreign currency into RMB.
[3]